While many small business owners may be uncomfortable with the uncertainty of selling product with extended payment terms, there are a variety of reasons why companies accommodate this type of payment structure. Extended terms increase new customer potential by accommodating the needs of larger companies, while also bridging supplier costs to allow for additional distribution outlets. This is because larger companies expect extended payment terms in order to accommodate slow accounts payable teams and/or quality control processes. If a business cannot accommodate this, then it is unlikely to get larger contracts. Recognizing your consumer’s challenges aids in resolving objections, thus increasing total sales.
WHY OFFER EXTENDED PAYMENT TERMS?
Payment terms are frequently used as a crutch for companies to help cover costs and manage internal cash flow. Using net 30, 60 or 90-day terms, the buyer can push out the payment dates to accommodate their capital structure. An example of this would be if a reseller had the opportunity to sell more of a product than it can afford to purchase in a given month.
Without extended terms the reseller won’t achieve maximum revenue potential, since the firm can only sell the amount of inventory that they can afford to stock, which also means that the manufacturer won’t be able to sell as much product. So, in order to maximize revenue on both sites, often times a product manufacturer will offer to provide a reseller with additional products which are to be repaid on extended terms.
WHY DON’T ALL COMPANIES OFFER EXTENDED TERMS?
There are two main reasons why a business may not offer extended terms for its customers:
- The business is transactional in nature, and doesn’t want or need to develop a relationship with its buyers in order to sell product
- The business does not operate in a manner that affords them enough working capital to cover operating expenses if they offer an extended payment plan
CREDIT ISN’T FREE
Extended payment plans are a tradeoff between internal and external company affairs. Businesses need to pay their vendors and employees immediately, but also want to accommodate their customers as much as possible. A great way to do this is to allow extended payment terms to your customers on an as-needed basis only. There are a few ways in which you can encourage this behavior:
REWARD PROMPT PAYMENT
By offering a discount to cash customers, buyers are incentive to pay immediately. The percent discount is completely discretionary, but is often based on the estimated cost that the business will have incur by as a result of not receiving payment immediately. This type of incentive will appeal to smaller buyers who can plan for the purchase, and but will still allow you to work with the larger contracts.
ACCOMMODATE COMPANIES THAT CAN’T PAY UP FRONT
Many larger corporations are extremely compartmentalized, and have a lengthy process by which they commission and approve purchases. As a result, they expect vendors to accommodate this process, including offer an extended amount of time to pay for purchases. If a business is not able to offer terms for its customers, then it is unlikely that it will get contracts from these larger corporations.
FIND A PARTNER THAT CAN HELP
Obviously, being able to offer extended terms to customers can help a business grow faster, and appeal to more customers. So, by partnering with a financial institution to purchase pending customer invoices, a company can offer extended terms with little to no impact on current cash flow. The process, usually referred to as invoice factoring, can be a great tool for companies to better accommodate the needs of its customers, without placing an additional burden on the company.
Invoice Factoring typically works as following:
- Sell your product or service as usual
- Invoice the client for amount due
- The factor pays you for the invoice, using it as collateral
- Once the customer pays, the transaction is closed
Since a factoring company will use invoices as collateral for the transaction, there is no credit check or additional collateral needed.
FIND OUT IF IT’S RIGHT FOR YOU
Here at Ultegra Business, we work with businesses in any stage of growth. Our team is equipped with a diverse set of financial knowledge and is happy to explore potential funding options, as well as answer any questions that may arise. Our unique one-on-one approach has allowed us to successfully offer loan approvals to over 90% of our applicants. If you’d like to learn more about Ultegra Business, give us a call at 1.888.893.6828 and speak with a loan advisor today, or apply online now. We look forward to helping you think outside the bank!